If you are a Company Director, you will need to consider what steps you should be taking during the COVID-19 pandemic to protect your business. This includes ensuring that you do not fall foul of your regulatory obligations.
Directors may be concerned that they would face a potential breach of their statutory duties if their response to the Coronavirus outbreak causes loss to the company. There is no doubt that these are difficult times to navigate.
As a Director, you will have duties to act in a way which you consider will promote the success of the company and act in the best interests of the company. These obligations are set out in Section 172 of the Companies Act 2006. Your obligations under the section will vary from taking steps to safeguard your employees as well as maintaining relationships with suppliers and customers, the need to act fairly as between the members of the company as well as maintaining the company’s reputation.
Directors should ensure that they are acting in good faith at all times and with the intention of securing the short and long terms survival of the company.
It is important to remember that a Court will not unpick the commercial judgment of directors and therefore if a company fails, it does not necessarily mean that it is down to the failings, statutory or otherwise, of the Director(s). However, Directors do need to be mindful of their obligations towards the company.
Another serious concern for Directors at this time is cash flow.
If a company is unable to pay its debts, it may be deemed to be insolvent and can be wound up. A company is insolvent under Section 123 of the Insolvency Act 1986, if it cannot pay its debts as they fall due (cashflow insolvency) or if the value of the company’s assets is less than the amount of its liabilities (balance sheet insolvency). More and more companies may find themselves faced with the immediate concern of being able to meet salary payments and other debts of the company, even with the assistance of the government aid which is being offered. For more information on the aid which is being offered, please refer to our various articles on the subject.
No company wants to find itself the subject of winding up proceedings during these unprecedented times. Company Directors should therefore take appropriate steps to ensure that they are not in breach of their duties in this regard.
Directors should consider the impact of the current worldwide health and economic crisis on existing financial and debt arrangements including scheduled repayments and should consider entering into dialogue with your lenders in relation to restructures as early as possible.
Should a company be forced to consider winding up proceedings, whether voluntarily or otherwise, if the Director did not take sufficient steps prior to insolvency to protect the company, then a Director may find themselves the subject of a wrongful trading claim. This occurs when the appointed insolvency practitioner can seek a contribution from a director if before commencement of the winding up proceedings, the Director knew or ought to have known that there was no reasonable prospect that the company could avoid going into liquidation or administration, but continued to trade, reckless as to the solvency of the company.
Directors would therefore be well advised to consider taking steps to monitor the company financials as the situation progresses, including holding regular board meetings to discuss the impact of COVID-19 and the company’s responses to same as well as implementing reporting and monitoring measures to keep the Board informed.
We can advise you if you have concerns about what you should or shouldn’t be doing, or if you are faced with company insolvency. Contact our team via the website or by phone on 0207 703 5034 to arrange a free consultation.
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